Nuclear Power Facilities and Licenses
The Nuclear Regulatory Commission (“NRC”) sets requirements for the safe operation of commercial nuclear power reactors, licenses the construction and operation of the reactors, and inspects them to assure they are operating safely within the agency's regulations. According to the NRC, there are 103 operating nuclear power reactors at 65 sites. These plants use nuclear energy to generate electricity and generate approximately 22% of electricity in the United States. From the 103 operating plants, there are approximately 48 licensees, 4 reactor vendors, and 80 different nuclear power plant designs.
Commercial nuclear power plants are licensed by the NRC for a 40-year operating period with possible renewal of the license for an extended period of operation of up to 20 additional years. The last new license granted by the NRC was issued in 1978 and there are currently no new licensing requests. Further, the NRC is not expecting any new applications in the near future. However, in 1998 two plants, Calvert Cliffs and Oconee, have applied for and received a 20-year license renewal. Further, the NRC and other regulatory authorities may encourage the extension of nuclear power plants in order to meet air emission standards.
Unless license extensions are granted, all current licenses will expire by 2035, including Calvert Cliffs and Oconee whose extensions will expire in 2018. In particular, licenses for twelve plants will expire by 2011, and licenses for thirty-six plants will expire between 2011 and 2015. It should also be noted that the NRC may issue an order to a licensee to suspend or permanently cease operations if the licensee fails to operate the facility in accordance with the terms of the license.
Nuclear Value Chain—Nuclear Plants Considered as a Business
Due to low and steady variable costs, nuclear power plants provide long-term stability of total costs. This allows nuclear power plants to offer forward sales that capture a market premium which can be much more valuable than the margin from low current production costs.
In particular, when the electricity industry is considered as a business, the economic value of nuclear power plants can be defined in stages. The Nuclear Energy Institute (“NEI”) refers to this analysis of economic value as the “nuclear value chain.” The nuclear value chain includes:                Low production cost: The going forward cost of electricity from a nuclear power plant is clearly competitive when compared to the market clearing price of electricity in the day-ahead market. However, nuclear units have significantly more value than simply the price they receive for electricity in the wholesale market.        Improved performance: The industry can continue to achieve improved performance through increased rates, shorter refueling outages, higher fuel burn-ups, and better management of O&M costs.        Future price stability: Nuclear facilities can leverage its high degree of future price stability by selling at a premium to large users an assured source of electricity supply at a known price. For example, presently some users in California are willing to pay this premium to protect themselves against the damaging effects of price volatility in the day-ahead market.        Site value: Nuclear power plants have significant additional site value, such as switchyards, access to the power grid, ingress and egress, and spare cooling capacity. In many cases, nuclear power sites were planned for more units than were built, providing room to build additional non-nuclear generation. Such diverse generation would enable a single site to execute forward sales in the bilateral contract market and participate in the day-ahead market, in particular selling highly profitable 10-minute spinning reserve capacity.        Clean air compliance value: The substantial emissions avoided by the use of nuclear energy reduce the compliance obligation and associated costs for affected fossil-fueled power plants, including capital outlays to bring fossil-fueled plants into compliance.        
Accordingly, based on the many advantages of nuclear power plants shown in the above nuclear value chain, the number of new nuclear power plants built, as well as the sale of existing plants, may increase.
Decommissioning
When nuclear facilities are shut down permanently, they enter a decommission process which will lead to the release of the site for unrestricted uses. Specifically, decommissioning a nuclear power plant can be defined as the cessation of operations and the withdrawal of the facility from service, followed by its transformation into an out-of-service state and eventually, its complete removal. Decommissioning activities are intended to place the nuclear facility in a condition that provides for the health and safety of the general public and the environment, while at the same time protecting the health and safety of the decommissioning workers.
Decommission begins when operations at a nuclear power plant are terminated. In most cases, the nuclear fuel, the mobile radioactive materials in the process systems, and the radioactive waste produced during normal operations are removed as soon as the plant ceases to operate. Certain equipment can also be removed and discarded. If the entire facility were to be dismantled immediately, however, the decommissioning workers would be exposed to higher levels of radiation than if the dismantlement were to be accomplished in several steps. Therefore, decommissioning activities have been divided into three stages. Each of these stages can be defined by two characteristics: the physical state of the plant and its equipment, and the surveillance needed to maintain that physical state.                Stage 1 decommissioning entails removing the spent fuel from the reactor, draining the liquid systems, disconnecting the operating systems, blocking and sealing the mechanical openings such as valves and plugs, and controlling the atmosphere inside the containment building. The facility is kept under surveillance, access is limited and routine inspections are carried out to assure that the plant remains in a safe condition.        Stage 2 decommissioning requires all equipment and buildings which can be easily dismantled to be removed or decontaminated and made available for other uses, leaving only the reactor core structure and its extensive shielding. The containment building and the ventilation system may be modified or removed if they are no longer needed for safety reasons, or they may be decontaminated to allow access for other purposes. Other buildings and equipment which are not radioactive may be converted for new purposes as well. Surveillance during Stage 2 is reduced, but it is desirable to continue periodic spot checks of the buildings as well as surveillance of the surrounding environment.        Stage 3 decommissioning requires that, unless the site, buildings or equipment are to be re-used for other nuclear purposes, all materials with radioactivity levels exceeding those closely equivalent to the natural radiation environment will be removed and the site released without restrictions or further surveillance.        
These three stages may be carried out by rapidly progressing from one stage to the next or carried out over a prolonged period lasting as long as 100 years or more. Although most facilities intend to complete all three stages, a facility could remain at Stage 1 or Stage 2 for a relatively long period of time, or decommissioning could proceed directly from Stage 1 to Stage 3.
According to the NRC, however, decommissioning must be completed within 60 years of permanent cessation of operations. In contrast, conservation groups such as the Sierra Club lobby for a 30 to 50 year completion time-frame. However, some decommissioning tasks cannot begin immediately after plant cessation. For example, current dry storage cask designs are licensed for spent fuel with a core discharge decay time averaging approximately five years or longer. Therefore, decommissioning operations for the plant's “fuel building” cannot be expected to begin prior to five years after the cessation of plant operations.
One open question regarding NRC licensing relates to possible deregulation of the nuclear power industry. Deregulation may cause some NRC licensees to cease being an “electric utility”, as defined in NRC regulations. If this occurs, the NRC will require the licensees to meet more stringent decommissioning funding assurance requirements that apply to non-electric utilities. Further, NRC is considering revising its financial and decommissioning funding assurance requirements.
Acceptable Decommissioning Alternatives
Decommissioning involves three different alternatives: DECON, SAFSTOR, or ENTOMB. Under DECON (immediate dismantlement), shortly after the nuclear facility closes, equipment, structures, and portions of the facility containing radioactive contaminants are removed or decontaminated to a level that permits release of the property and termination of the NRC license. Note that the required work force during DECON is one-third to one-tenth the required number of people employed during normal operations. As is evident, the work force and associated costs are high.
Under SAFSTOR, often called “delayed DECON,” a nuclear facility is maintained and monitored in a condition that allows the radioactivity to decay; afterwards, the nuclear facility is dismantled. For example, if a new plant is built next to an existing plant, then this will enable the existing plant to go into SAFSTOR upon license expiration. The personnel that operate the new plant will be able to look over the SAFSTOR plant without incurring significant costs. Therefore, decommissioning the plant after SAFSTOR will lower the cost of decommissioning. It follows that if new nuclear power plants are ever built, it would be likely that they would be built next to existing facilities. This may allow the older facilities to be placed into SAFSTOR at little cost.
Under ENTOMB, radioactive contaminants are encased in a structurally sound material such as concrete and appropriately maintained and monitored until the radioactivity decays to a level permitting release of the property. ENTOMB is not presently allowed by NRC regulations but is under consideration as a possible option.
A licensee may also choose to adopt a combination of the first two alternatives in which some portions of the facility are dismantled or decontaminated while other parts of the facility are left in SAFSTOR. The decision may be based on factors besides radioactive decay such as availability of waste disposal sites. However, most facilities will use either immediate DECON or a DECON after some period of SAFSTOR.
As stated, under NRC regulations, decommissioning must be completed within 60 years. A time beyond that will be considered only when necessary to protect public health and safety in accordance with NRC regulations.
Actual Decommissioning Experience
As of January 1998, there have only been five plants that have completed the DECON process, three nuclear power plants, and two Department of Energy (“DOE”) plants. Further, six nuclear power plants are now in various stages of dismantlement and decontamination and eleven nuclear power reactors are currently in long term storage (SAFSTOR).
Decommissioning Cost Estimates
The total cost of decommissioning is dependent on the sequence and timing of the various stages one through three, described above. Deferment of a stage tends to reduce its cost, due to decreasing radioactivity, but this may be offset by increased storage and surveillance costs.
Even allowing for uncertainties in cost estimates and applicable discount rates, decommissioning contributes less than 5% to total electricity generation costs. In the United States, many utilities have revised their cost projections downwards in the light of experience, and estimates from 1998 now average $325 to $500 million per reactor and up.
Financing methods vary; however, the most common methods are:                Prepayment: Money is deposited in a separate account to cover decommissioning costs even before the plant begins operation. This may be done in a number of ways but the funds cannot be withdrawn other than for decommissioning purposes.        External sinking fund (Nuclear Power Levy): A fund is built up over the years from a percentage of the electricity rates charged to consumers. Proceeds are placed in a trust fund outside the utility's control. This method is the main method in the United States, where sufficient funds are set aside during the reactor's operating lifetime to cover the cost of decommissioning.        Surety fund, letter of credit, or insurance: Purchased by the utility to guarantee that decommissioning costs will be covered even if the utility defaults.        
In the United States, utilities generally collect 0.1 to 0.2 cents per kW-hour to fund decommissioning. They must then report regularly to the NRC on the status of their decommissioning funds. As of 1998, $22.5 billion of the total estimated cost of decommissioning all U.S. nuclear power plants had been collected, leaving a liability of about $9.5 billion to be covered over the operating lives of 103 active reactors.
Further, in accordance with NRC regulations, decommissioning cost estimates are required at five different periods, which are:                1) at the time of NRC licensing,        2) five years before anticipated shutdown,        3) with a Post-Shutdown Decommissioning Activities Report (PSDAR) submittal,        4) two years following shutdown (this is the first time that the cost estimate has to be site specific, prior to this the facility could use estimates from similar sites as their basis), and        5) two years preceding the anticipated termination of the license.        
Note that decommissioning costs do not include the cost of removal and disposal of spent fuel or of non-radioactive structures and materials beyond that necessary to terminate the license.
Nuclear Decommissioning Trusts
As should be appreciated, nuclear facilities have extraordinary costs at the end of their lives. By NRC regulation, these costs must be collected and managed during the life of the facility, creating several valuation issues. As the term of its license ends, a nuclear facility will be decommissioned and radioactive portions safely removed or contained. As stated, typical decommissioning costs for nuclear facilities approach $500 million dollars per reactor, based on NRC minimum facility funding for a large nuclear unit. Although funding depends on unit size, and other factors, these current dollar estimates for decommissioning costs and the future cost could be triple this estimate, or more, by the end of a typical full life of these facilities.
By regulation, the dollars collected for decommissioning are periodically deposited into an externally managed investment fund or trust (external sinking fund), discussed above, and kept separate from an owner's other assets. The objective is to accrue an amount that is sufficient to pay for decommissioning costs as of the termination date of the facility.
Two types of trust funds can be used to accrue amounts for decommissioning: a qualified trust fund and a non-qualified trust fund. The non-qualified trust fund receives no special tax treatment, whereas the qualified trust fund is provided special timing considerations and tax benefits. Internal Revenue Code Section 468A allows for the establishment of qualified trust funds.
Under the qualified trust funds, contributions to these funds are immediately deductible in computing taxable income. Although any revenue that may be received specifically for decommissioning is included in taxable income, the contributions to a qualified trust fund are immediately deductible as an offset. The net effect is that no taxable income will be recognized until expenditures are actually incurred for decommission, at which time actual decommissioning costs are treated as deductible expenses. This tax method has the advantage of recognizing revenues during the same future tax-period that the expense will be incurred.
In contrast, contributions to non-qualified trust funds are treated as income during the tax period earned and therefore are not immediately deductible. Thus, while amounts collected from customers are included in taxable income, the contribution to a non-qualified trust does not offer a current tax deduction. Consequently, non-qualified funds collected from customers need to include a “gross up” for taxes, to allow sufficient after-tax amounts to fund the trusts.
The income earned by the funds is also subject to different tax rates. Qualified funds are subjected to a 20% federal tax rate. The non-qualified funds are taxed at the federal tax rate, which currently is typically 35%. Although it is advantageous to maximize contributions to a qualified find, the amount that is allowed for deposit into a qualified trust fund is restricted by rules governed by the state regulatory commission and the Internal Revenue Service.
Any amounts withdrawn from a qualified fund are taxable during the tax period of the withdrawal. For the non-qualified find, however, there is no taxable income recognition on withdrawal from the funds because no tax deduction had been allowed on the original contribution. A tax deduction for the actual decommissioning costs expended is taken for both types of funds during the tax period of the expenditure. Therefore, to the extent that money withdrawn from a qualified fund is used to meet decommissioning expenses, there will be an equal offset between revenue and expenses for the tax period.
For example, NISA Investment Advisors, L.L.C. (“NISA”) manages $2.4 billion in fixed income and equity portfolios for twenty-one Nuclear Decommissioning Trust clients. NISA has estimated that the total qualified decommissioning trust has $16.3 billion in assets while the total non-qualified decommissioning trust has $5.6 billion.
Equity allocations in qualified trusts and non-qualified trusts continue to grow with target allocations of 55% for both trusts. Currently, the qualified trusts equity allocation is 48% of assets, while the non-qualified equity allocation is 56% of assets. NISA expects 1999 total contributions to qualified decommissioning trusts to be $1,074 million, and $356 million for non-qualified trusts. In addition, 58% of the investor owned nuclear decommissioning trusts are subject to state income taxes. The median state tax rate is 7.8%, where the maximum is 12.8% and the minimum is 2.0%. NISA published after-tax asset returns for investor owned decommissioning trust in 1998 are:
NominalReal*Qualified6.7%2.5%Non-Qualified6.2%1.8%*Estimated real returns are the difference between sponsors' nominal return and inflation assumptions.
A 1998 study conducted by NISA indicated the following factors that contribute to the uncertainty of funding of the decommissioning liability, according to owners. These factors are (ranked by degree of uncertainty):                Waste Disposal Cost Inflation        Regulatory Environment        Asset Returns        Early Decommissioning        Deregulation        Labor Cost Inflation        Energy Cost Inflation        Method of DecommissioningNuclear Decommissioning Inflation        
NRC licensees are required to annually adjust the amount of decommissioning funding assurance based on inflation estimations. For example, decommissioning cost inflation assumptions declined by 40 basis points (“bps”) over the past two years, slightly less than the decline in the Consumer Price Index (“CPI”).
According to NISA, the inflation average rate is 4.3% with a median rate of 4.1% and a standard deviation of 1.3%. A 1999 study conducted by NISA indicated that the average inflation assumption for waste burial costs, accounting for 22% of total decommissioning costs, were 9.9%. Adjustments by licensees are either based upon a revised decommissioning estimate or by using the following inflation adjustment factor (set for by the NRC):0.65L+0.13 E+0.22 B                where L=Labor escalation factor        E=Energy and transportation escalation factor        B=Escalation factor for waste burialCorrelation of Decommissioning and CPI Inflation        
As part of the CPI, Labor and Energy costs are naturally correlated therewith. Although, low level waste may not be correlated with the CPI, based upon the above formula, the annual low-level waste inflation would need to be 27% in order to have the total decommissioning inflation be 6.0% above CPI.
The costs for low-level waste disposal are determined by market conditions of the demand for the disposal of low-level waste and the supply capacity of facilities that can accept the low-level waste. Currently, there are only three facilities that are licensed to accept low level waste: Barnwell (in South Carolina), Hanford (in Washington), and Clive (in Utah). Historical escalation of low-level waste has been higher than CPI escalation; however, for the following reasons, this may not be the case in the future:                1. The Federal government has stated that it is the individual state's responsibility to dispose of the low-level radioactive waste. The states have formed eleven compacts to date where the states within each compact will work together to decide upon, where to develop new disposal facilities that could be used for all of the states within that compact. There will be economic pressure on the states to develop their own disposal sites if the low-level disposal costs continue to escalate, or as the existing facilities reach their waste capacity.        2. Rapidly increasing fees for disposal of low-level waste have spawned the creation of a niche market for firms specializing in the management of low-level waste. Since these firms are controlling the low level waste disposal of several companies, they are in a better position to negotiate disposal fees. These firms also specialize in volume reduction or waste treatment so that the waste could be disposed of in solid waste landfills.        3. Efficiencies in decommissioning should be studied as more and more nuclear power plants go through decommissioning.Decommissioning Financial Assurance Requirements        
An NRC licensee may take credit for projected earnings on the prepaid decommissioning trust funds using a 2% annual real rate of return from the time of future funds' collection through the projected decommissioning period. This includes the periods of safe storage, final dismantlement, and license termination, if the licensee's rate-setting authority does not authorize the use of another rate. However, actual earnings of existing funds may be used to calculate future find needs.
Insurance Requirements for Financial Assurance of Decommissioning
Any surety method or insurance used to provide financial assurance must be open-ended, or if written for a specific term, must be renewed automatically. The exception is if ninety days or more preceding the renewal date, the issuer notifies the Commission, the beneficiary, and the licensee of its intent to not renew. The surety or insurance must also provide that the full amount be paid to the beneficiary, automatically preceding the expiration date without proof of forfeiture, if the licensee fails to provide a replacement acceptable to the Commission within thirty days after receipt of notification of cancellation. In addition, the surety or insurance must be payable to a trust established for decommissioning costs, and the trustee and trust must be acceptable to the Commission. The surety method or insurance must remain in effect until the commission has terminated the license.
Acceptable Payments for Decommissioning
The NRC licensee is permitted to use 3% of the generic amount of decommissioning funds, even while the facility is operating for engineering design, work package preparation, and licensing activities. After submitting the certification of permanent cessation of operations and the certification that the fuel has been removed from the reactor vessel, the licensee may use an additional 20% of the funds for any legitimate decommissioning activities. However, the licensee is prohibited from using the remaining 77% of the generic decommissioning funds until a site specific cost estimate is submitted to the NRC.
Further, the licensee must not perform any decommissioning activity that results in there no longer being reasonable assurance that adequate funds will be available for decommissioning.
Disposal of High-Level and Low-Level Radioactive Waste
During decommissioning, both high-level and low-level radioactive waste must be disposed of properly. High-level radioactive wastes are: (1) irradiated (spent) reactor fuel; (2) liquid waste resulting from the operation of the first-cycle solvent-extraction system, and the concentrated wastes from subsequent extraction cycles in a facility for reprocessing irradiated fuel; and (3) solids into which such liquid wastes have been converted.
The DOE became responsible for the permanent disposal capacity for spent fuel and other high-level nuclear wastes in the Nuclear Waste Policy Act of 1982. The DOE was suppose to be able to accept waste in 1998; however, the DOE is still investigating possible sites. Presently, Yucca Mountain in Nevada is under investigation as a possible disposal facility; however, it is not likely that this site will be available prior to 2015.
Although the DOE is responsible for the disposal of the spent fuel, the licensees are incurring significant costs in the construction and monitoring of the ISFSI (Independent Spent Fuel Storage Installation) which is required since the DOE is not ready to accept the spent fuel. This has created a tremendous amount of litigation where the licensees are suing the DOE. It is expected that this litigation may go on for several years.
Low-level waste is any radioactive waste that is not classified as high-level waste. As stated above, there are currently only three active licensed disposal facilities of low-level radioactive waste.
U.S. Price Anderson Act
The Price Anderson Act provides coverage for “any legal liability” arising from a “nuclear incident” with three specific exclusions: (1) worker's compensation claims for persons employed at the site in connection with the activity, (2) claims arising out of an act of war, and (3) damage to property at the site used in connection with the activities of the licensee. This last exclusion implies that the Price Anderson Act does not cover decommissioning costs.
Federal Statutes require reactor operators to maintain primary financial protection equal to the maximum amount of liability insurance available from private insurance sources at reasonable terms. See 10 C.F.R. § 50.54(w).
The Act provides a three layered system of financial protection and indemnity agreements. In the first tier, licensees are required to provide proof of financial assurance protection in an amount equal to the maximum liability insurance available from private sources, currently $200 million. The second tier provides for a retrospective premium payment mechanism, whereby the industry would share liability for any damage resulting from a nuclear incident, currently $9.5 billion. In the event of such an incident, each commercial reactor licensee would be assessed a prorated share of damages up to the statutory maximum of $83.9 million per reactor per incident, but are limited to no more than $10 million annually per reactor per incident. In the third tier, the indemnity is guaranteed by the U.S. government.
Property Insurance
To meet the requirements of 10 C.F.R. § 50.54(w), nuclear power plant licensees need to purchase the maximum coverage available. Currently, there are two levels of property insurance that provide coverage of post-accident stabilization and decontamination costs, “primary” and “excess” coverages.
For example, both American Nuclear Insurers (“ANI”) and Nuclear Electric Insurance Limited (“NEIL”) offer primary property coverage up to a limit of $500 million. ANI offers excess coverage in the amount of $600 million, and NEIL offers excess coverage in the amount of $2.25 billion. The combined amount of coverage available is at least $1.1 billion, and potentially as much as $3.85 billion in property insurance.
It is therefore an object of the present invention to provide a financial product and method for providing financial assurance for decommissioning a nuclear power plant using insurance.
Another object of the present invention is to provide a financial product, such as a decommissioning insurance policy, and method for receiving premiums from a trust, investing the received premiums, and paying actual decommissioning expenses back to the trust.
A further object of the present invention is to provide a financial product and method for accurately determining the premium of the financial product independent of the actual year decommissioning begins.
Various other objects, advantages and features of the present invention will become readily apparent from the ensuing detailed description and the novel features which will be particularly pointed out in the appended claims.